trading_example - Short Sales Purpose : to profit from a...

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Margin trading and short selling Examples
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       Stock Margin Trading Maximum margin is currently 50%; you can borrow up to 50% of the stock value Set by the Fed Maintenance margin : minimum amount equity in trading can be before additional funds must be put into the account Margin call : notification from broker you must put up additional funds (equity+)
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       Margin Trading - Initial Conditions X Corp $70 50% Initial Margin 40% Maintenance Margin 1000 Shares Purchased Initial Position Stock $70,000 Borrowed $35,000 Equity 35,000
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       Margin Trading - Maintenance Margin Stock price falls to $60 per share New Position Stock $60,000 Borrowed $35,000 Equity 25,000 Margin% = $25,000/$60,000 = 41.67%
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       Margin Trading - Margin Call How far can the stock price fall before a margin call? (1000P - $35,000) * / 1000P = 40% P = $58.33 * 1000P - Amt Borrowed = Equity
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Unformatted text preview: Short Sales Purpose : to profit from a decline in the price of a stock or security Mechanics Borrow stock through a dealer Sell it and deposit proceeds and margin in an account Closing out the position: buy the stock and return to the party from which is was borrowed Short Sale - Initial Conditions Z Corp 100 Shares 50% Initial Margin 30% Maintenance Margin $100 Initial Price Sale Proceeds $10,000 Margin & Equity 5,000 Stock Owed 10,000 Short Sale - Maintenance Margin Stock Price Rises to $110 Sale Proceeds $10,000 Initial Margin 5,000 Stock Owed 11,000 Net Equity 4,000 Margin % (4000/11000) 36% Short Sale - Margin Call How much can the stock price rise before a margin call? ($15,000 *- 100P) / (100P) = 30% P = $115.38 * Initial margin plus sale proceeds...
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This note was uploaded on 05/10/2008 for the course FIN 367 taught by Professor Han during the Spring '08 term at University of Texas at Austin.

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trading_example - Short Sales Purpose : to profit from a...

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